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(Bloomberg) — Treasuries rose as a drop in oil prices improved the outlook for US inflation.
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The gains Thursday trimmed yields across maturities by two to three basis points to hit session lows during the US morning, when European bonds also advanced.
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Oil prices have tracked shifting sentiment about the prospects of ending the US-Israeli war on Iran that has disrupted Middle East supply. They resumed declining after a report that United Arab Emirates and Iranian officials held a pivotal meeting this week overshadowed threats from President Donald Trump to significantly escalate the conflict by seizing Iran’s key oil hub.
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The oil-driven moves in bonds were complicated by the release of US inflation data showing bigger increases in wholesale prices in May than economists had estimated. Core prices excluding energy and food rose less than estimated, however.
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“Many are telling us they think the worst of the inflation data is in,” said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. Lower-than-expected increases in core inflation despite higher energy prices “has changed the mindset of the Treasury market at least temporarily.”
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US government bonds are little changed on the week after strong May employment data released June 5 altered expectations for the Federal Reserve, whose policy-setting committee meets next week for first time since Kevin Warsh succeeded Jerome Powell as head of the US central bank.
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Fed officials are widely seen leaving their target range for the federal funds rate unchanged at 3.5%-3.75%, where it’s been since December. However quarterly revisions to their forecasts for interest rates and the economy may reflect the war-driven surge in energy prices that has many investors looking for a quarter-point rate increase by year-end and seeing strong chances of another one by mid-2027.
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Thursday’s rally reduced the expected yield for an auction of 30-year bonds at 1 p.m. New York time, the third and final sale of longer-term Treasury debt this week. Demand was good for sales of three- and 10-year notes over the past two days. The indicated yield for the 30-year bond auction was just under 5% after exceeding 5.04% earlier in the session.
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Last month’s 30-year bond auction on May 13 drew 5.046%, the highest for a sale of the tenor since 2007. The 30-year yield reached its highest level of the year, near 5.20%, on May 20 after quickening inflation and strong US economic and stock market performance backed the growing consensus for a Fed rate increase.
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The European Central Bank raised interest rates Thursday for the first time since 2023 in an expected move that its president, Christine Lagarde, said was necessary because of the energy price shock.
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